New Delhi: Foreign investors have significantly increased their purchases of Indian government bonds (securities) last week. Investments have increased by approximately 46 times, indicating that the Reserve Bank of India’s (RBI) efforts to strengthen the currency (rupee) are instilling confidence in the market.
RBI’s Currency Hedging Policy and Its Impact
The Reserve Bank of India has intervened strongly to prevent the rupee from falling. Following this move, the rupee strengthened by approximately 1%. The RBI believes that the rupee is being targeted by speculators and that attempts are being made to weaken it. Therefore, the bank will continue to intervene until the rupee strengthens and stabilizes.
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High Interest Rates and Foreign Investment
The interest rate on India’s 10-year bonds is approximately 6.5%, one of the highest in the region. Therefore, Indian bonds are becoming increasingly attractive to foreign investors. Investors benefit from this high interest rate as well as the stable or rising value of the rupee.
Rupee on the mend
The rupee has strengthened the most in four months in the past few days, limiting its decline against the dollar to just 2.6% this year. However, it remains one of Asia’s weakest currencies. Nevertheless, RBI intervention is improving the situation for both the rupee and bonds.
Improving Bond Returns
Rupee-denominated bonds in October yielded investors a 1.9% return, compared to only 0.2% for other emerging market bonds. Better interest rates and a potential rupee appreciation are driving foreign investor interest.
Reducing Inflation and Policy Support
Bond yields had previously risen due to US tariffs and the RBI’s steady interest rate. However, expectations of lower inflation and monetary policy easing in India are providing further support to bonds. Yields that rose in the September quarter have eased slightly in October.
Expert Opinion
Experts believe that the market has already adjusted well to some of the past negative factors. Therefore, the RBI’s recent actions are being viewed as positive. The situation of Indian bonds and the rupee is considered favorable for foreign investment.
Risks and Future Prospects
However, if trade tensions escalate again or the RBI reduces its support, this positive market sentiment could weaken. However, if the business environment improves, both the rupee and bonds could perform even better.
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Strong intervention by the Reserve Bank of India, higher interest rates, and better inflation control have boosted foreign investor confidence. Both the rupee and bonds have performed well recently, making Indian government bonds attractive to foreign investors. Although some risks remain, further investment is likely to increase in the future if the business environment improves.